Feb. 24 (Bloomberg) -- The location of the National Credit
Union Administration suits its place in the hierarchy of U.S.
financial regulators. Unlike its better-known peers, which are
all clustered near the Capitol or the White House, the agency is
a 20-minute drive from downtown Washington in good traffic.

That hasn’t stopped senior executives at two of the world’s
largest asset-management firms, BlackRock Inc. and Pacific
Investment Management Co., from trekking out to the agency’s
Virginia offices. Their mission: Convince Chairman Debbie Matz
their companies don’t threaten the financial system.

Heading up an agency that monitors thousands of mostly
small credit unions, Matz is an unlikely big-time lobbying
target. Her popularity stems from a different role -- she holds
a seat on a secretive uber-regulatory panel that is assessing
which financial companies should be overseen more like Wall
Street banks to prevent a replay of the 2008 credit crisis.

The contacts with Matz are part of the fund industry’s
three-year campaign to influence members of the Financial
Stability Oversight Council. The lobbying is one reason the
FSOC, as the panel is known, has slowed deliberations on whether
the firms should be formally designated “systemically
important,” two people with knowledge of the process said.

“The asset managers are really going all out,” said
Joseph Engelhard, a former Treasury and congressional aide who
is now senior vice president at Washington consultant Capital
Alpha Partners LLC. “It’s a full-court press, and so far,
they’re doing it well.”

Four Votes

Since the council’s designation requires a two-thirds vote,
the fund companies can avoid the more costly oversight if their
lobbying can sway four of its 10 members. The votes by Matz or
by Roy Woodall, a representative with insurance industry
expertise, count as much as those cast by the chairmen of the
Federal Reserve or Securities and Exchange Commission.

As part of their search for allies, the firms have stoked a
turf battle between the FSOC and the SEC, which is the primary
overseer of the fund industry and whose commissioners are wary
of losing the authority. Treasury Secretary Jacob J. Lew, the
chairman of the FSOC, is also President Barack Obama’s top
economic adviser and a member of his cabinet, while the SEC is
designed to be insulated from political considerations.

At one point, the contretemps led Lew to rebuke SEC
Chairman Mary Jo White, according to two people briefed on the
incident. Like others interviewed for this story, they spoke on
condition of anonymity because the conversations were private.

‘Best Strategy’

“The asset managers are going to be more successful making
their case to members who are more independent of the
administration, that’s the best strategy for them,” said
Stephen Myrow, managing partner of Beacon Policy Advisors LLC,
an investment research shop in Washington.

Barbara Novick, a vice chairman and co-founder of
BlackRock, the world’s largest asset manager, said her visits
have been valuable because the panel members may be more
familiar with banks than investment firms.

“A lot of it has been truly educational and less
advocacy,” she said in an interview.

Spokesman Dan Tarman of Pimco didn’t respond to requests
for comment. Adam Banker of Fidelity Investments, which also has
lobbied, declined to comment. Suzanne Elio, a Treasury
spokeswoman who handles FSOC matters, declined to comment.

The authors of the Dodd-Frank Act established the FSOC in
part on the premise it would be pointless to tighten rules for
banks if other big financial players could take risks without
enough oversight. The panel, which gathers at the Treasury, held
10 meetings last year, two of which included public sessions.

Designating AIG

Other voting members are the heads of the Federal Deposit
Insurance Corp., the Office of the Comptroller of the Currency,
the Consumer Financial Protection Bureau, the Commodity Futures
Trading Commission and the Federal Housing Finance Agency.

The FSOC last year approved systemic designations for
insurers American International Group Inc. and Prudential
Financial Inc. and the finance arm of General Electric Co. It
then signaled it would review asset managers who, like the other
designees, would join Wall Street banks under Fed supervision.

While the council hasn’t discussed the matter publicly, the
Treasury’s research office conducted an industry study for the
FSOC that was published in September. It highlighted the sizes
of BlackRock, Pimco, Fidelity and Vanguard Group Inc. The four
companies manage almost $10 trillion for investors such as
pension funds, 401(k) plans and families saving for college.

Regulators and lawmakers have long debated the risks. While
asset managers weren’t bailed out in 2008 like big banks, one
product line -- money-market mutual funds -- figured in the
crisis. Panicked investors withdrew hundreds of billions of
dollars when one fund’s shares fell below the typical $1 value.

Halting Run

The withdrawals threatened to cause a more serious shock
because the largest banks depend on short-term loans from the
funds to finance their operations. To stop the run, the
government had to promise money-fund investors it would
temporarily cover any losses.

In their lobbying materials, the fund companies say 2008
isn’t an argument for putting their entire businesses under
systemic oversight. They say they differ from banks because
their funds aren’t backed by U.S. guarantees; fund companies
don’t make big trades with their own assets; and because clients
direct their investments and can withdraw them at any time.

‘Kafka Novel’

Jeff Connaughton, a former Senate aide who worked on parts
of the Dodd-Frank law, said the biggest fund companies
“absolutely” should be studied by the FSOC. The 1998 implosion
of hedge fund Long-Term Capital Management, which had to be
bailed out by its Wall Street creditors to avoid a larger market
collapse, shouldn’t be forgotten, he added.

“We’ve already had a crisis triggered by an asset
manager,” Connaughton said. “This needs to be examined.”

FSOC officials haven’t explained publicly how decisions
about asset managers will be made. Groups including the U.S.
Chamber of Commerce, which has criticized the panel, have told
lawmakers that lack of transparency is one reason to rein it in.

The secrecy and uncertainty feel like “living in a Kafka
novel” said Brian Reid, chief economist of the Investment
Company Institute, the mutual-fund industry’s main trade group.

“I’m on trial but don’t know who is accusing me or what
I’m accused for,” Reid said in an interview. “All of a sudden,
it happens.”

Plan Backfires

BlackRock and Fidelity started lobbying after Dodd-Frank
was enacted in 2010, meeting with the Fed late that year to
discuss the issue, Fed records show. The industry also was
pushing the SEC to tighten rules for money-market funds, hoping
narrower measures would stave off systemic regulation, said
people briefed on the strategy. The plan backfired in 2012 when
the SEC failed to reach consensus and then-Chairman Mary
Schapiro left the issue in the FSOC’s hands.

The industry’s campaign got new momentum after last year’s
study by the Treasury’s Office of Financial Research, which
warned that the largest fund managers could disrupt markets by
“herding” investors seeking higher returns into certain
products. The funds also “could pose, amplify or transmit
threats” to the financial system through their use of
derivatives and participation in shadow-banking markets for
repurchase agreements and securities lending, the report said.

The study was shared with the SEC, where staff members and
commissioners disagreed with many findings, according to two
people briefed on the discussions.

Treasury Call

In late September, SEC chief White notified the FSOC that
her agency wanted to seek public comments on the study, the
people said. The FSOC hadn’t planned to invite public responses,
and when the SEC went ahead, some members were infuriated by the
move. Lew called White to express his displeasure, and she
apologized for getting ahead of the process, the people said.

John Nester, a spokesman for the SEC, declined to comment.

When the report came out, the FSOC rocketed to the top of
Fidelity’s Washington agenda, said a person familiar with the
firm’s strategy. At one private meeting, another person said,
Fidelity executives said they were worried they’d be more likely
to fall under extra oversight than BlackRock because that firm’s
chief executive officer, Laurence Fink, is close to the Obama
administration.

Brian Beades, a BlackRock spokesman, said the comment about
Fink “must have been made in jest.” He said BlackRock has been
making the case to regulators that the best way to address
concerns about risks outlined in the Treasury’s report “is to
improve those products and practices, not simply name firms
based on the amount of their assets under management.”

Lobby Tour

BlackRock set out to meet with representatives of all the
voting FSOC members, according to government documents and
people familiar with the matter. In October, according to
records posted on the credit union agency’s website, Novick
visited Matz at the regulator’s headquarters in Alexandria.

Novick met with Matz and the agency’s chief economist, John
Worth, to discuss the FSOC decision-making process and the
research office study, the records show. Six weeks later, Novick
visited Worth again. Pimco general counsel David Flattum met
with Matz and Worth in November.

Matz, 63, isn’t new to Washington politics and lobbying.
Before taking over at the credit-union regulator in 2009, she
was on its board from 2002 to 2005 as an appointee of President
George W. Bush. She also was a member of President Barack
Obama’s economic transition team. John Fairbanks, a spokesman
for Matz, said she wouldn’t comment on FSOC matters.

Public Pressure

The asset managers targeted White at the SEC as well. In
January, lobbyists from BlackRock and Allianz SE, the parent
company of Pimco, visited her at the commission’s headquarters.
They were joined by Tim Pawlenty, president of the Financial
Services Roundtable, whose membership includes BlackRock and
Allianz, two people with knowledge of the talks said.

The industry also sought to stir up public pressure. In
December, 16 ex-regulators sent a letter to the Wall Street
Journal, published under the title, “Don’t Regulate Asset
Managers as If They Were Banks.”

The group was organized by one of the signers, former SEC
Commissioner Paul Atkins, now at Patomak Global Partners LLC,
people briefed on the matter said. His firm’s clients include
the Investment Company Institute and Fidelity. Atkins said in an
interview the letter had nothing to do with his consulting work.

In recent weeks, the fight surfaced publicly in Congress.
Subcommittees in the House and Senate summoned Richard Berner,
head of the Treasury’s research office. Before the sessions,
BlackRock’s Novick, the trade group’s Reid and Fidelity lobbyist
J.J. Johnson briefed aides from both parties, two people
familiar with the discussions said.

‘Fundamental’ Misunderstanding

At the hearings, the lawmakers lit into Berner.

The report “reflected a fundamental lack of understanding
of the asset-management industry,” North Carolina Republican
Patrick McHenry, chairman of the House Financial Services
subcommittee on oversight and investigations, said on Feb. 5.

Berner told lawmakers the study was meant to inform the
council, not to single out any asset managers or immediately
bring the industry under more oversight. “I think it is
responsible to put the information out there,” he said at a
Jan. 29 Senate hearing.

The SEC’s White didn’t paper over her agency’s differences
with the report. She told the Senate Banking Committee Feb. 6
that the SEC had “agreed to disagree” with the Treasury’s
research department on some matters.

Math Problem

After the uproar, the FSOC slowed its work on asset
managers and began to study whether another firm, Berkshire
Hathaway Inc., should be designated, according to two people
with knowledge of the process.

The fund companies don’t expect the issue to go away. They
are working to beat back a similar designation process by global
regulators, which could spur the FSOC to act.

If the U.S. council does take up the matter, the arithmetic
won’t favor the industry.

In the most recent action on a company, the panel’s vote
was 7-2, with one abstention, in favor of a systemic designation
for Prudential. The ’no’ votes came from Woodall, the insurance
expert who has been generally skeptical about extending
oversight, and Edward DeMarco, who at the time was acting head
of the Federal Housing Finance Agency. DeMarco has now been
replaced at the agency and on the board by Melvin Watt, a former
Democratic congressman who lobbyists see as more pro-regulation.

Even if the industry were able to win over Matz, Woodall
and White, for example, it still would be one vote short of
stopping a two-thirds majority.

SEC’s Move

A middle ground between systemic designation and the status
quo remains possible. Mary Miller, the Treasury’s undersecretary
for domestic finance, said Feb. 6 that the oversight council
could decide either to designate asset managers or address the
issue “through other regulatory measures.”

The panel’s decision could be influenced by the SEC, which
may be going its own way.

The agency is again working to complete rules for money
funds. In addition, White said in a speech last week she had
ordered the agency’s staff to come up with a way to increase
oversight of big asset managers. She said the FSOC’s systemic
designation process should “avoid a rigidly uniform approach
solely defined by the safety and soundness standard that may be
more appropriate for banking institutions.”

Myrow, the Beacon Policy analyst who is also a former
Treasury official, said industry executives believe that in the
end the council will tag a few big fund companies. Regardless of
any business reasons against that move, regulators don’t want to
appear weak in the wake of the 2008 crisis.